Why Honda Is In Even More Trouble Than You Think [Deep Thoughts]

To many observers, Honda appears to be going through the corporate equivalent of a mid-life crisis. Supply problems from the effects of the Japanese earthquake and tsunami and flooding in Thailand, along with less-than-complimentary write-ups on the new Civic by Car and Driver, Consumer Reports, and others, are bearing the brunt of the blame for […]

June 1, 2012 AT 3:15 PM
By
Dave Mable

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To many observers, Honda appears to be going through the corporate equivalent of a mid-life crisis. Supply problems from the effects of the Japanese earthquake and tsunami and flooding in Thailand, along with less-than-complimentary write-ups on the new Civic by Car and Driver, Consumer Reports, and others, are bearing the brunt of the blame for the slump in calendar-year 2011 sales. Further issues: Acura’s inability to attain tier-one luxury-car consideration or status among consumers, Honda’s attempt to build a pickup truck, and the firm’s precipitous sales decline in its home market of Japan.

But even though it will raise the ire of Honda executives and brand loyalists alike, the company’s problems aren’t simply the aftereffects of the world’s climate gone mad or a substandard take on a bestselling vehicle.

It’s worse than that.

There is good reason to consider Honda to be in a similar place as General Motors was in, say, January of 1981. We need to preface this by saying the business and product environment of 31 years ago couldn’t be more different from the climate in which the Japanese company seems to be struggling today, but the parallels with what is happening to Honda now are all too familiar to students of The General’s decline.

In May of 2009, Jim Collins, an author who contributes to the Harvard Business Review and other business journals, published How the Mighty Fall. In the book, Collins describes the five stages of demise in the world of modern business. They are:

Stage 1: Hubris Born of Success

Stage 2: Undisciplined Pursuit of More

Stage 3: Denial of Risk and Peril

Stage 4: Grasping for Salvation

Stage 5: Capitulation to Irrelevance or Death

Looking back at General Motors from mid-1945 up to the fateful day in June of 2009 when it declared bankruptcy, the stages and their effects can easily be identified. It’s tougher with Honda, mainly because it’s going through the end of Stage 2, the shank of Stage 3, and the early part of Stage 4 all at the same time right now.

1) Hubris Born of Success

GM’s Stage 1 period saw the company release highly engineered but woefully underdeveloped products like the Vega’s liner-less aluminum-cylinder-block/iron-head engine and front-drive X-cars, the doomed-from-the-start development of the RC2-206 rotary engine, and the cylinder-deactivating Cadillac V-8-6-4. In the case of our subject Japanese automaker, Stage 1 was highlighted in 1973 by the company displaying a Chevrolet small-block V-8 with a revised induction system and CVCC heads to show that Honda’s combustion technology obviated the need for a catalytic converter to meet the stringent 1975 emissions regulations. Honda, an engine builder par excellence, developed a mechanical solution to a chemical problem: controlling exhaust emissions from an engine running on unleaded fuel. This was akin to developing a machine to cure a headache so you don’t have to take an aspirin. And then Honda stuck with CVCC long after the system’s sell-by date before moving to catalysts like everybody else.

In the 1987–1988 timeframe, Honda had its dealers and buyers all but begging for a six-cylinder engine in the Accord, but refused to accommodate the requests. The company’s argument was that a V-6 was unnecessary since the company could make an inline-four with as much power as a contemporary six. And while that last part was true, the company believed it was smarter than the market. This is a treacherous train of thought for any business. At the most elemental level, no company is smarter than its customers. It is the customer who knows what he will spend his money on, and American businesses spend billions annually to determine what motivates the consumer and what it takes to get him/her to shell out their dead presidents. (Fast forward to today, when many automakers are abandoning V-6s in their family sedans in favor of four-cylinder-only lineups, often using turbos to deliver six-cylinder power. The next Accord will offer a V-6.)

2) The Undisciplined Pursuit of More

During Stage 2, General Motors demonstrated conclusively that it was, in fact, impossible to turn an Oldsmobile gasoline-fueled V-8 into a viable diesel engine. Another example of the company’s total lack of discipline was the “Transatlantic-assembled” Cadillac Allanté, whose Pininfarina-built bodies were flown to Detroit from Italy to be mated with the chassis. When Honda was in the core of its Stage-2 thinking, the company pursued a partnership with BL Limited (later The Rover Group) to prop up the British manufacturer’s failing passenger-car business using Honda platforms. (Remember Sterlings?) Understanding the precarious position of its U.K. partner, Honda saw the arrangement as a way to potentially quick-start European production. It didn’t work out for Honda when BMW flew in and picked up Rover before the Japanese could act, and the company had to develop its European manufacturing base the old-fashioned way.

In the United States, the company experienced the ultimate excess of success when a couple dozen of its managers, some dealers, and some vendors were indicted in a bribery scandal involving preferential distribution of its hottest cars to retailers. The event shook the company’s North American operation to its foundation. Also during this stage, Honda acquired 100 percent of British American Racing to create its own Formula 1 program. We all know how well that turned out.

3) Denial of Risk and Peril

Stage 3 was the toughest for General Motors to come to grips with, and that appears to be the case for Honda. Going back to January 1981, GM was at the top of its game. The company had launched the then-radical X-car platform (Chevrolet Citation, Buick Skylark, et al.) at all four volume divisions and sales were astronomical. The J-car (Chevrolet Cavalier, Cadillac Cimarron, Pontiac Sunbird, et al.) was in the pipeline for launch in April, and the company’s downsized large and mid-size cars were selling well. However, all of these cars were more cheaply made, had worse assembly quality, and, in some cases, were styling failures compared to the vehicles they replaced. They sold only on the strength of the nameplates attached to them, and it was inertial marketing at its best. But GM management didn’t see it that way. After all, sales were up and only coastal loons bought crappy Datsuns, Toyotas, and Hondas.

Discuss the shortfalls of some newer Honda products with that company’s management types and they’ll talk about how well the models are selling or how well they would be selling if only they could make enough of them. Historically, Honda was one of those automakers where generation-to-generation product improvement was both blatant and a given. Recently, that hasn’t been the case.

Grok the Crosstour. It’s not ugly. Really! Honda said so on its Facebook page. Facebook proclamations or not, there are some in the automotive design community that refer to the misshapen five-door as the “Medusian Ambassador.” Honda’s stubborn insistence on keeping the course for this vehicle can be seen in the latest Crosstour “concept,” which previews a second-gen production model that looks basically the same as the current one.

Other than the excellent Fit, recent succeeding versions of existing Honda models have tended to be fussier, cheaper, and generally less interesting than the cars they superseded. Nowhere is this better illustrated than with the Civic. Park a new one next to the last version and do a walk-around. Pretty much every aspect of the 2012 Civic is cheaper than its predecessor. Inside, the story is the same with materials cheapened and fits worse. If Honda “pulled a Jetta” with the Civic, it could be excused. While the current Jetta doesn’t compare well with its immediate predecessor, at least VW dropped the base sticker. With the new Civic’s MSRP, it’s as though Honda was saying, “If you’re stupid enough to pay this, we’ll take the money and run.” Harsh words, and we haven’t even gotten to Stage 4. (At least Honda has admitted some errors with the Civic, and is said to be rushing improvements into production. Whether this will substantively improve the car is yet to be seen.)

4) Grasping for Salvation

At this point in the process, General Motors made weird acquisitions in the belief that they would make the company more profitable. As it turned out, a lot of capital was spent on a myriad of companies, none of them essential to GM’s core business: Hughes Electronics, EDS, Saab. The list goes on.

Other than the Formula 1 team, Honda hasn’t gone on a drunken buying spree, but it has made investments as mind-bogglingly irrelevant as the General’s purchasing pandemonium. Do any of you really believe anthropomorphic robots are part and parcel of Honda’s future viability? And the less said about the HondaJet, the better. If you believe that ASIMO and the HA-420 are vital to the future of Honda Motor Company, you should think again. They are both just more noise in the system that further distracts Honda from its significant problems at hand.

This is the stage when things get really messy and the downturn in core business steepens. When a new venture (the design and manufacture of air-interceptor missiles, development of a nascent human-style robot, or whatever) doesn’t provide the expected corporate uplift, the best minds are transferred from their actual fields of expertise to the new, high-profile operations. This further weakens a company’s core business and makes recovery even more difficult. Over the past decade, this has manifested itself at Honda within the planning department. Populated with individuals who have little real understanding of, sensitivity to, or connection with product, the department concocts customer abstracts so interchangeable business drones can comprehend the intent of a new vehicle. In the case of the first-generation RDX, this abstract was “Jason,” a young, upwardly mobile, urban-residing male that needed a turbocharged engine, “Super Handling All-Wheel Drive,” and room to transport all his lifestyle accouterments. Yeah, okay. As it turned out, there weren’t many “Jasons” buying the RDX. Planning got that part wrong—really wrong. The idea that product knowledge, sensitivity, and a comprehension of the new-vehicle market can be abstracted into the form of bullet-pointed nonexistent customers is, frankly, insane. The methodology is doubly destructive as it rewards the ability to devise synthetic buyers while purging real car or truck knowledge and insight from the planning function. The damage from this kind of product generation continues up through the organization by allowing management, with no more awareness of the market than a grapefruit, to make billion-dollar product decisions with minimal deleterious career consequences. At GM, this kind of planning gave us the 1997 Chevrolet Malibu. At Honda, it explains many of the new Civic’s shortcomings.

5) Capitulation to Irrelevance or Death

While General Motors never was able to pull out of its economic tailspin, Honda doesn’t have to experience Stage 5. In How the Mighty Fall, author Collins writes, “Decline can be avoided. Decline can be detected. Decline can be reversed.” But the company has to understand—no, believe—that its viability is on the line, and what might seem to be a minor issue could turn out to be a make-or-break turning point for its continued operation.

Honda’s problems ultimately aren’t engineering problems. They aren’t manufacturing problems or product problems, either. Those are just manifestations of the real issue. Honda’s problems are management problems. The past two decades have seen Honda devolve into an American car company headquartered in Minato, Tokyo, Japan. Drunk on North American profits, the company has performed horribly in the troubled Japanese domestic market, it has been unable to get any significant traction in Europe, and is a non-player in much of South America.

Let there be no doubt, Honda still is a viable business. But every new product that doesn’t match up to its predecessor siphons off a bit of the company’s strength. Each wrong move places the firm one step farther down the same path walked by GM from January 1981 until June 2009.